An economic analysis and impact assessment is being carried out by the OECD to support the work of the OECD Inclusive Framework on tax challenges of the digital economy. A preliminary analysis was published on 14 February 2020, with a final analysis to be completed by the end of March 2020.

The OECD estimates that the combined effect of Pillars One and Two would be an estimated global net revenue gain up to 4% of global corporate income tax revenues (USD 100 billion annually) depending on how the reforms are designed. The gains would be similar, measured as a share of corporate tax revenues, across high, middle and low income countries with a significant reduction in profit shifting.

Pillar One

Pillar One would provide for substantial reallocation of taxing rights looking beyond physical presence and allocating some of the tax base of multinational groups to market jurisdictions based on a specified formula.

In relation to the reallocation of taxing rights Pillar One would slightly increase tax revenues as some taxing rights shift from low tax to higher tax jurisdictions. Most economies would see a small gain in tax revenue with relatively more tax revenue going to low and middle income countries. Investment hubs (defined as jurisdictions with inward FDI more than 150% of GDP) would lose some tax revenue.

Pillar Two

Pillar Two, which aims for a minimum level of tax to be paid globally by multinational groups, would raise significant revenues, the amount depending on the design and the level of the chosen minimum effective tax rate. The proposal would reduce tax differentials between jurisdictions and would be important for developing countries as they are more impacted by profit shifting.

There would only be a small effect on investment costs as many entities will not be affected by the proposals. The measures target enterprises with high levels of profitability and low effective tax rates.

The location of investments would be less influenced by corporate taxes and investment could therefore be driven more by factors such as infrastructure, education levels and labour costs. Investment would therefore be channelled to jurisdictions where it could be more productive.

Methodology of Impact Analysis

The impact of Pillar One was examined on the assumption that the residual profit threshold (based on a ratio of profit-before-tax to turnover) was either 10% or 20% and this would be the basis for allocating taxable profit to market jurisdictions.

In calculating the impact of Pillar Two it was assumed that the incentives for profit shifting depend on the tax rate differentials between jurisdictions. This assumes that profit has been shifted if it is located in jurisdictions that have relatively high foreign direct investment (FDI) and a relatively low effective tax rate, and a specified rate of profitability is exceeded.

The model assumes that Pillar Two reduces the amount of profit shifting where it reduces the tax rate differentials by impacting the tax rate of jurisdictions that charge tax below the minimum rate. The impact of Pillar Two would therefore be measured by comparing the tax rate differentials before and after the application of the new rules.

To perform the analysis data was taken from aggregate country by country reporting data from 24 headquarters jurisdictions; and an international database of unconsolidated firm-level financial data was used for 25 jurisdictions (mainly European). The database of OECD activities of multinational enterprises (AMNE) was used for data for affiliate jurisdictions and the data was then extrapolated to other jurisdictions (not covered by the other data sources) based on certain sources of macro data including data on foreign direct investment.

The combined effect of Pillars One and Two was examined based on four scenarios, with assumptions about changes (if any) in multinational group behaviour and the reaction by governments.